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Fintech

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Financial technology, also known as FinTech, is an industry composed of companies that use new technology and innovation with available resources in order to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services.[1] Financial technology companies consist of both startups and established financial and technology companies trying to replace or enhance the usage of financial services of incumbent companies.

There is no consensus on the definition of "FinTech"; a review of definitions published in 2016 synthesized the various scholarly definitions published over the past forty years as "a new financial industry that applies technology to improve financial activities”.[2] Another definition from a procedural perspective, is that term 'FinTech' refers to new applications, processes, products or business models in the financial services industry, composed of one or more complementary financial services and provided as an end-to-end process via the Internet.[citation needed]

Key areas

Fintech has been used to automate insurance, trading and risk management.[3]

The services may originate from various independent service providers including at least one licensed bank or insurer. The interconnection is enabled through open APIs and supported by regulations such as the European Payment Services Directive.[4] These solutions can be differentiated into at least five areas.[5]

  1. The banking and insurance sectors are distinguished as potential business sectors. Solutions for the insurance industry are often more specifically named "InsurTech".
  2. The solution with regards to their supported business processes such as financial information, payments, investments, financing, advisory and cross-process support.[6] An example is mobile payment solutions.
  3. The targeted customer segment distinguishes between retail, private and corporate banking as well as life and non-life insurance. An example is telematics-based insurance that calculates the fees based on customer behavior in the area of non-life insurance.
  4. The interaction form can either be business-to-business (B2B), business-to-consumer (B2C) or consumer-to-consumer (C2C). An example is a social trading solutions for C2C.
  5. The solutions vary with regard to their market position. Some, for example, provide complementary services such as personal finance management systems, others focus on competitive solutions such as e.g. peer-to-peer lending.
Sector Business process Customer segment Interaction form Market position
  • Bank
  • Insurer
  • Bank/insurer
  • Non-bank/insurer – bank/insurer-cooperation
  • Non-bank/insurer – bank/insurer-competition

Global investment in financial technology increased more than twelvefold from $930 million in 2008 to more than $12 billion in 2014.[7] The nascent financial technology industry has seen rapid growth over the last few years, according to the office of the Mayor of London. Forty percent of the City of London's workforce is employed in financial and technology services.[8]

In the United States, there are numerous FinTech companies and startups, including Debtbench, Affirm, Betterment, Behalf, Birch Finance, Clearwater Analytics, Fundera, IEX, Kabbage, Lending Club, Money.net, Nomis Solutions, Plaid, Prosper, Robinhood, SoFi, Square, Stripe, Think Finance, Wealthfront and GreenSky LLC.[9]

In Europe, $1.5 billion was invested in financial technology companies in 2014, with London-based companies receiving $539 million, Amsterdam-based companies $306 million, and Stockholm-based companies receiving $266 million in investment. After London, Stockholm is the second highest funded city in the EU in the past 10 years. Europe's FinTech deals reached a five-quarter high, rising from 37 in Q4 2015 to 47 in Q1 2016.[10][11] Financial technology companies in Europe include ID Finance, which uses Big Data to measure credit risk when making loans and is now active across Russia, Brazil, Spain, Poland, Kazakhstan and Georgia.[12]

In the Asia Pacific region, the growth will see a new financial technology hub to be opened in Sydney, in April 2015.[13] There is already a number of strong financial technology players like Tyro Payments and Stockspot in the market and the new hub will help further accelerate the growth of the sector. A financial technology innovation lab is also being launched in Hong Kong to help foster innovation in financial services using technology.[14] A leading online lending platform that operates in Hong Kong and China is WeLab, which has raised the second largest Series B fundraising in FinTech globally.[15] In 2015, the Monetary Authority of Singapore launched an initiative named Fintech and Information Group to draw in start-ups from around the world. It pledged to spend $225 million in the fintech sector over the next five years.[16] A leading online platform that operates in Singapore is Smartkarma, which has raised $4.7 million in funding to expand its investment research platform.[17] and VMoney from the Philippines.[18]

Within the academic community, on the technology side the Financial Data Science Association (FDSA) was founded with its first event organized by members from the artificial intelligence, machine learning, and natural language processing domain. The FDSA aims to build a research community around computer science and investment statistics. On the business side, Wharton FinTech was founded at the Wharton School of the University of Pennsylvania in October 2014 with the objective of connecting academics, innovators, investors, and other thought leaders within the FinTech industry to each other and to the ideas that are reinventing global financial services. The University of Hong Kong Law School in conjunction with the University of New South Wales have published a research paper tracing back the evolution of FinTech and its regulation.[19]

Awards and recognition

Financial magazine Forbes created a list of the leading disrupters in financial technology for its Forbes 2016 global Fintech 50.[20]

A report published in February 2016 by EY commissioned by the UK Treasury compared seven leading FinTech hubs. It ranked California first for 'talent' and 'capital', the United Kingdom first for 'government policy' and New York first for 'demand'.[21]

Industry context

In the financial advisory sector, established players such as Fidelity Investments have partnered with financial technology startups such as FutureAdvisor (recently acquired by BlackRock), allowing new technology to work within a prominent custodian.[22] Another big financial player, Barclays, has been active in working with fintech startups through their Barclays Accelerator[23] (powered by Techstars). Barclays also launched the biggest fintech center[24] in Europe to fuel its innovation. Even celebrities including Snoop Dogg, Jared Leto, and Nas are beginning to put their resources into the nascent FinTech space by investing in financial technology startup Robinhood.[25]

Outlook

Finance is seen as one of the industries most vulnerable to disruption by software because financial services, much like publishing, are made of information rather than concrete goods.[26] In particular blockchains have the potential to restructure the cost of transacting in a financial system.[27] While finance has been shielded by regulation until now, and weathered the dot-com boom without major upheaval, a new wave of startups is increasingly "disaggregating" global banks.[28] However, aggressive enforcement of the Bank Secrecy Act and money transmission regulations represents an ongoing threat to FinTech companies.[29]

Challenges and solutions

In addition to established competitors, FinTech companies often face doubts from financial regulators.[30]

Data security is another issue regulators are concerned about because of the threat of hacking as well as the need to protect sensitive consumer and corporate financial data.[31][32] Leading global Fintech companies are proactively turning to cloud technology to meet increasingly stringent compliance regulations.[33]

The Federal Trade Commission provides free resources for corporations of all sizes to meet their legal obligations of protecting sensitive data.[34] Several private initiatives suggest that multiple layers of defense can help isolate and secure financial data.[35]

Any Data breach, no matter how small, can result in direct liability to a company (see the Gramm–Leach–Bliley Act)[36] and ruin a FinTech company's reputation.[37]

The online financial sector is also an increasing target of distributed denial of service extortion attacks.[38][39]

Marketing is another challenge for most FinTech companies as they are often outspent by larger rivals.[40]

This security challenge is also faced by historical bank companies since they do offer Internet connected customer services.[41]

References and notes

  1. ^ Infinite Financial Intermediation, 50 Wake Forest Law Review 643 (2015)
  2. ^ Schueffel, Patrick (March 9, 2017). "Taming the Beast: A Scientific Definition of Fintech". Journal of Innovation Management. 4 (4): 32–54. ISSN 2183-0606.
  3. ^ Aldridge, I., Krawciw S., 2017. Real-Time Risk: What Investors Should Know About Fintech, High-Frequency Trading and Flash Crashes. Hoboken: Wiley. ISBN 978-1119318965
  4. ^ Scholten, Ulrich. "Banking-as-a-Service - what you need to know". VentureSkies. Retrieved January 16, 2017.
  5. ^ Alt, R., Puschmann, T. (2012). The rise of customer-oriented banking – electronic markets are paving the way for change in the financial industry. Electronic Markets, 22(4), 203–2015.
  6. ^ "FinTech Innovation Labs eligibility criteria". Accenture. Retrieved November 26, 2014.
  7. ^ "The Boom in Global Fintech Investment" (PDF). Accenture. 2014. Retrieved December 9, 2014.
  8. ^ "What is FinTech and why does it matter to all entrepreneurs?". Hot Topics. July 2014. Retrieved December 9, 2014.
  9. ^ Shin, Laura. "The Fintech 50 – In Photos: Fintech 50: The Future Of Your Money". Forbes. Retrieved May 16, 2016.
  10. ^ "Stockholm FinTech: An overview of the FinTech sector in the greater Stockholm Region". Stockholm Business Region. June 2015. Retrieved July 12, 2015.
  11. ^ "Fintech Investments Skyrocket in 2016– Report". redherring.com. Retrieved July 12, 2016.
  12. ^ "Barcelona's ID Finance raises $50 million in debt funding to expand fintech to developing countries". February 16, 2017. VentureBeat. Retrieved April 3, 2017.
  13. ^ "Sydney FinTech hub based on London's Level39 coming next April". BRW. November 2014. Retrieved November 26, 2014.
  14. ^ "FinTech Innovation Lab in Hong Kong Launches With Eight Firms". Forbes. February 2015. Retrieved February 9, 2015.
  15. ^ https://assets.kpmg.com/content/dam/kpmg/pdf/2016/05/the-pulse-of-fintech.pdf
  16. ^ "Fintech – the next frontier for Hong Kong's battle with Singapore?". Retrieved September 26, 2016.
  17. ^ hermes (June 8, 2016). "Start Singapore: Financial research firm raises $6.4m to expand". Retrieved September 26, 2016.
  18. ^ www.lcsgroup.com.ph, Casha, FinTech Start-up Bolsters Financial Inclusion For Working Filipinos
  19. ^ "The Evolution of FinTech: A New post Crisis Paradigm?". Douglas W. Arner, Janos Barberis, Ross P. Buckley. October 2015. SSRN 2676553. {{cite web}}: |access-date= requires |url= (help); Missing or empty |url= (help)
  20. ^ Samantha Sharf (November 7, 2016). "The Fintech 50: The Complete List 2016". Forbes. Retrieved April 30, 2017.
  21. ^ "An evaluation of the international FinTech sector" (PDF). EY. February 24, 2016. Retrieved February 25, 2016.
  22. ^ "Fidelity Investments Forges Alliance With Low-Cost Player". The New York Times. October 2014.
  23. ^ "Barclays Accelerator". www.barclaysaccelerator.com. Retrieved May 3, 2017.
  24. ^ CNBC.com, Neil Ainger; Writer for (May 3, 2017). "Barclays opens 'biggest fintech center in Europe' as it aims to experiment and spot early trends". CNBC. Retrieved May 3, 2017.{{cite web}}: CS1 maint: multiple names: authors list (link)
  25. ^ "Nas, Snoop Dogg Bet Big on Robinhood App". Black Enterprise. September 2014.
  26. ^ http://imperialfx.co.uk/fintech-boom-fintech-will-outlive-bank/
  27. ^ Tasca, Paolo; Tomaso Aste; Loriana Pelizzon; Nicolas Perony (2016). Banking Beyond Banks and Money: A Guide to Banking Services in the Twenty-First Century. Springer. p. 215. ISBN 9783319424484. Retrieved November 16, 2016.
  28. ^ "How FutureAdvisor plans to shake up wealth management". Fortune. May 2014.
  29. ^ "Criminalizing Free Enterprise: The Bank Secrecy Act and the Cryptocurrency Revolution". Westlaw's Computer & Internet Journal. July 2, 2015.
  30. ^ "Old Laws, New Models". Taylor Wessing. October 2014.
  31. ^ "Ensuring Cybersecurity In Fintech: Key Trends And Solutions". Forbes (magazine). March 2015.
  32. ^ "Protect Your Assets: Cybersecurity + FinTech". Wharton Fintech. March 2015.
  33. ^ "How FinTech Leaders Are Using The Cloud To Meet Compliance". Solgari.com. {{cite web}}: Cite has empty unknown parameter: |dead-url= (help)
  34. ^ "Data Security". Federal Trade Commission.
  35. ^ "Top 10 ways to secure your stored data". Computerworld. August 3, 2006.
  36. ^ "Data Security Considerations for FinTech Companies". Bloomberg. April 23, 2013.
  37. ^ "Financial Startups Reimagine Banking, but Security Still Paramount". Cloudbric. July 10, 2015. Retrieved September 15, 2015.
  38. ^ "Banks Lose Up to $100K/Hour to Shorter, More Intense DDoS Attacks". American Banker. April 23, 2015.
  39. ^ "How Hackers Make Money from DDoS Attacks". Fintech Ranking. April 23, 2015.
  40. ^ "4 Rules for Late Stage FinTech Marketing". North Point Partners. July 2015.
  41. ^ "Who lies behind the latest cyber attacks on JPMorgan Chase?". The Economist. August 28, 2014.

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